Candlestick charts are used in trading to identify possible price movements based on previous patterns. It shows four price points - open, close, high, and low - throughout the period in which a trader specifies.
What are Candlesticks?
Candlesticks represent price movements with different colors, and these are used by traders to make trading decisions according to the regularly occurring patterns, which helps in forecasting the price of the asset’s short-term direction.
Candlestick Components
The candlestick contains a wide part, which is known as the real body. It represents the price range between the opening and closing prices of that day’s trading session.
When the real body is filled in or appears in color black, it means that the closing price is lower than the opening price. It was vice versa when the real body is empty or appears as the color white.
Instead of appearing as only black and white, traders can change these colors on their trading platform. For instance, a down candle is most of the time shaded as red instead of black, and the up candles are often shaded as green instead of white.
Lies above and below the real body are called shadows or wicks. These show the high and low prices of that day’s trading stretch.
If the upper shadow located on the down candle is short, it means that the opening price that day was near the highest price of the day.
Meanwhile, a short upper shadow on an up day indicates that the closing price was near the high. The look of the candlestick determines the relationship between the days open, high, low, and close.
To sum up, real bodies could be long or short and black or white, while shade could be long or short.
Candlestick vs. Bar Charts
The candlestick and bar charts show the same information in different ways. The former is more visually appealing than the latter due to the color coding of the price bars and thicker real bodies, which are better at pointing out the differences between the opening and closing prices.
Basic Candlestick Patterns
Candlesticks are made by the price's up and down movements. While these price motions appear random, they form patterns that traders use for analysis and trading purposes at other times. There are many different candlestick patterns, such as bullish and bearish.
Bullish patterns mean that the price is about to rise, while bearish patterns indicate that the price will fall.
However, no pattern works all the time since candlestick patterns only represent tendencies in price movement and not guarantees.
Bearish Engulfing Pattern
A bearish engulfing pattern is developed in an uptrend trajectory when sellers outnumber buyers. This action is reflected by a long red real body that engulfs a small green real body. The pattern indicates that sellers are back in control and that the price will continue to plummet.
Bullish Engulfing Pattern
A bullish engulfing pattern takes place when buyers outpace sellers, seen in the chart by a long green real body engulfing a small red real body. With this, the price is projected to climb as bulls establish some control.